Auction formats in the art tend generally to be of the sealed-bid or ascending-bid variety. In the standard sealed-bid auction, bidders—in one single bidding round—simultaneously and independently submit bids to the auctioneer, who then determines the auction outcome. In the standard ascending-bid auction, bidders—in a dynamic bidding process—submit bids in real time until no more bids are forthcoming. An ascending-bid format offers the advantage that there is feedback between participants' bids: each bidder is able to infer other bidders' information about the value of the object(s) as the auction progresses and incorporate this information into his subsequent bids. This feedback tends to result in more efficient auction outcomes as well as more aggressive bidding, resulting in higher expected revenues for the seller.
However, standard ascending-bid formats—such as the design used by the Federal Communication Commission for auctioning radio communications spectrum—have the disadvantage that they do not generally lead to outcomes which are efficient in the sense of assigning objects to the bidders who value them the most. Most ascending-bid auction formats have the unfortunate property that identical objects sell at the uniform price reached at the end of the auction. This creates incentives for bidders to engage in demand reduction: bidders have incentive to understate the values that they place on marginal units in order to reduce the market-clearing price (and, hence, the price they will pay on the inframarginal units that they will win in any case). This has clear negative implications both for efficiency and for revenues.
My prior patent, “System and Method for an Efficient Dynamic Auction for Multiple Objects,” (U.S. Pat. No. 6,026,383, issued 15 Feb 2000) provides an early version of a system and method for a dynamic auctions which may achieve efficiency for situations involving multiple identical objects. The current invention is an improved system and method for a dynamic multi-unit auction which may achieve efficiency in more general economic environments.